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Why The Oil Industry Can No Longer Rely On China

The global oil sector is reeling from a combination of negative oil prices, storage overload, demand destruction, and calls for a renewable energy revolution in the post-COVID-19 era. US and European oil market analysts appear to be pinning their hopes on a rebound in oil demand from Asia. Even international financial institutions, such as the IMF, WB, ECB and OECD indicate that the future of economic and energy demand growth is inextricably linked to the future of China and, increasingly, India. OPEC oil and gas producers, after decades of prioritizing Western economies, have been rerouting their investments and oil and gas strategies to capture these markets of the future. Before COVID-19, China was already a key global center for trade, investments and geopolitical influence. While some critical reports have been warning about the worrying economic and financial situation of China, mainstream investors and operators still had the country as their top investment target. Growing concerns about Beijing’s geopolitical aggression in the South China Sea and the negative impact of its One Belt One Road initiative were not enough to dissuade nations and global conglomerates from engaging economically with the Asian giant. Arab OPEC producers weren’t immune to China’s influence either, with over 50 percent of their overall investments going to the country. China, the argument goes, would always be a vital partner due to its huge population and growing political-economic reach. Then came COVID-19. The unexpected implications of this global pandemic had only previously been discussed in thinktank reports and Hollywood horror films. Nobody, it seems, thought it would ever become a reality. Now that it has, the major potential fallout from this transformative disease is far bigger than most people think. Related: Goldman Sachs Expects Another Oil Price Crash

The true extent of the damage caused by COVID-19 is yet to be seen, mainly due to the trillions of dollars of government support that has been given to businesses. But geopolitical relations and trade routes have already changed drastically. China’s web of influence is now unraveling as it has become clear just how dangerous it is to rely so heavily on just one country for international trade and security. The lack of resilience in the global economic system, especially when it comes to production and trade, is going to very negatively impact China in the coming years. A new resilience based on a diverse economic system will be needed to confront and mitigate future international crises or pandemics. For oil producers, especially the Arab OPEC producers and Russia, relying on China to consume a majority of their future production is a dangerous game. Just as US shale is far too heavily reliant on Cushing storage and paid the price when WTI prices crashed into negative territory as Cushing hit capacity, Arab producers have been hit hard by Chinese demand destruction.

The next development, one that is already visible within major OECD countries, will be to rethink future investment projects or current financing schemes, and set up new non-Chinese production centers or bring industry and production back home. This may sounds like Trump’s ‘America First’ policy, but it is seen by European parties as a necessary to counterweight to the ever-growing influence of China. A Make Europe Great Again (MEGA) policy, based on shortages of Chinese products, has already gained traction. The automotive, chemical and medical sectors are reconsidering their relationships with China. Discussions are clearly on the table to bring production facilities back home or to set up new ones in India, Egypt or other places, where high-tech, high education levels, and low costs are also available. Related: $110 Trillion Renewables Stimulus Package Could Create 50 Million Jobs

OPEC’s strategists should also take a step back and look beyond China when it comes to economic interests. A restructuring of production, supported by geopolitical, financial and operational issues, outside China will directly put a major damper on oil and gas supplies and demand in the Tiger State.

OPEC and Russia should assess the options that OECD countries, supported by others, are considering regarding the restructuring of their China policies. New emerging regions will be needed to increase the resilience of the global economy. This transformation will rapidly and dramatically influence future energy demand trade flows. Saudi Arabia, UAE, Qatar and Kuwait, must consider this before they are confronted by a fait-a-compli. COVID-19 has transformed international relations, nationalism has returned to influence the economic policies of two of the largest economic power players in the world, the USA and the EU. If it fails to act, OPEC’s oil and gas future will hit hard by lower Chinese demand. The oil cartel needs a new resilience-focused approach to its economic policies. The future of oil and gas demand will not be focused purely in China, and any nations with an interest in the industry should start to plan for that future now.

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This is a mishmash of ideas that are haphazardly assembled with no chance of ever gelling together. Moreover, they have more to do with political motivation and far less to do with reality.

China by virtue of being the world’s largest economy based on purchasing power parity (PPP), the largest crude oil importer and the most integrated economy in the global trade system has always been the real driver of both the global economy and the global oil market before the coronavirus outbreak and will remain so post-coronavirus.

Therefore, it is absolutely right for international financial institutions like the IMF, World Bank, ECB, OECD and even OPEC to pin their hopes on a rebound in oil demand in the Asia-Pacific region led by China.

China is already bouncing back extremely quickly in all sectors, except those relating to the service industries with projections already abound that China could grow at 6.8% in 2021 compared with 6.1% in 2019. Given the speed by which China is bouncing back, it could be projected to grow at 4%-5% in the second half of this year compared with 3%-3.5% in the first half. Moreover, China will be hugely thirsty for crude oil. This development won’t only give a huge impetus to an oil market bereft of good news but could also prevent oil prices from sliding below $30-$35 a barrel while the coronavirus outbreak is still raging.

The restarting of China coincides with the shutting down of most of the world’s economy causing lower commodity prices. Every crisis offers opportunities, including this one. China is seizing the opportunity of super-low oil prices to expand its strategic oil reserves before prices rise again. It is also stocking up on cheap LNG.

OPEC+ oil producers have nowhere to sell the bulk of their crude oil except in the Asia-Pacific region and to China in particular. With President Trump considering imposing a tax or tariff of foreign crude oil exports to the United States, the OPEC+ producers would rather enhance their presence in the Asia-Pacific region rather than pay a tax intended to rescue a sinking US shale oil industry from collapse at their expense.

The extraordinary measures China has taken under the leadership of President Xi Jipiang have enabled it to control the outbreak and open the country to business again. May be countries of the world including the United States could learn a lesson from China on how to stop the outbreak in its tracks in such a short time.

Instead of praise, the bashing of China particularly in the United States continues unabated with some resident scholars at the American Enterprise Institute (AEI) accusing China with falsifying figures of coronavirus-infected people and deaths. However, this is no more than sour grapes on the part of the China bashers. China wouldn’t falsify figures because to do so would have risked plunging 1.4 billion Chinese into the worst health disaster in the history of mankind.

And whilst the coronavirus outbreak might show an aspect of rivalry between the United States and China, the rivalry between them goes far beyond national productivity and whoever recovers first from the heinous coronavirus. It is about the next world order and who will emerge as the dominant power in the 21st century. It is also about the petro-yuan supplanting the petrodollar as the oil currency of the world.

The inevitable rise of China is being underpinned by the fact that it is currently the world’s largest economy, the workshop of the world, the world’s largest importer of crude oil, the growing importance of the petro-yuan, the Belt and Road Initiative (BRI) and above all the Russian-Chinese strategic alliance which will lead the new world order in the 21st century and will also shape it.

The BRI has enabled China to integrate its economy in the global trade system far more than the United States’. That is why China won the trade war with the US. Moreover, by offering loans and helping most countries of the world modernize their infrastructure and starting wealth-creation projects, China’s economy is benefiting immensely by expanding the market for its global trade.

The sound (although somewhat speculative) reasoning of the article is further re-enforced by the unmentioned fact that China itself has huge potential carbon energy resources which are waiting for the right technologies to exploit, and of course, talented Chinese scientists and engineers are very busy developing the required enabling technologies. These include 'shale-oil' and offshore 'gas-hydrates' both of which are estimated to be available in enormous quantities. They also include Renewable Energy resources: geothermal, wind, sun, hydro, and wave for which we can expect higher levels of exploitation in the nearest future, especially given new storage options. Even without COVID-19, China was moving up the value-chain, and as result some manufacturing especially at the low end of the value chain was moving to emerging market countries such as Vietnam, India, Ethiopia, etc. but now, this trend will no doubt be accelerated. And while China's energy self-sufficiency is still at least a decade away, even without the demand destruction of COVID-19, China, and India too for that matter), will be able to continue to take advantage of what has not only become a clear buyer's market, but a market which is unlikely ever to flip into a seller's market again. As for OPEC, it will survive only if grants more autonomy to members in pricing decisions (i.e. ceases to be a cartel) and focuses on pooling financial resource and scientific/engineering talent to develop new (and greener...) products and markets for them.

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